Bond Market Correlation and Emini Valuation

Wednesday 20 June 2007

Bond Market Correlation and Emini Valuation

Since April, the divergence between the Bond and Emini markets has been widening. The chart above shows the Bond Oscillator that measures Emini valuation against Bonds. This has stayed stubbornly above zero (over-valued) and peaked above +5 multiple times. These over-valued peaks are plotted as white bars; under-valued troughs (below -5) are plotted as red bars.

Over the last week the Bond market has bounced, while the Emini appears to have peaked and started a down move. As a result the Emini valuation against Bonds is coming closer to equilibrium. The current reading is +2.6, equilibrium would be zero. My best guess is that the Emini will continue lower over the next few days and we will reach the equilibrium / zero level this time.

The Emini closed down 22.00 points at 1,527.00 on Wednesday. Yesterday’s TRIN bearish divergence signal worked out well. GeorgeK wanted to know what the TRIN Oscillator was doing, so I’ve included the chart below. As you can see the TRIN Oscillator peaked on Friday and turned down on Monday (turning points are shown with white and red dots). So everything was lining up nicely for a short move – Bearish Divergence and TRIN Oscillator down.

An update on positions. The last trade was short 2 contracts from 1,523.25 on 8 June 2007. One contract was closed out at the 10 point profit target. The second contract had an open profit of over 19 points but never reached the stretch target of 1,500 and ended up being closed out at break even. Net result 5 points profit per contract. Greed got in the way of good judgment that time.

In after hours trading last night we got short 2 contracts at 1,553.00. One contract has already been closed out at the 10 point profit target. The second contract has an open profit of 26 points and we’re looking to take profits at 1,525.00. Good luck with your Emini trading.

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